Why Still Invest in Crypto in 2022
In the middle of the 2022 market storm, I want to share more about my crypto investments (in both crypto currencies and crypto-shares, these are shares of companies active in the crypto market). This thesis is part of my broader crypto strategy that involves both companies and crypto currencies. In this article I want to share why I think you are still early by making investments in the crypto market in 2022. You can read the prequel in this older article where I introduced how I approach my crypto investments.
First off, and in full disclosure: my investment thesis has been underperforming since I posted this article.
My crypto-shares are down 14% on average since I wrote about it in August 5, 2022. And my overall crypto portfolio is down 40%.
But… I still fully believe in what I call the Bitcoin-Appreciation Thesis (BAT). Let me break it down for you.
Why I Think BTC and Crypto Investments Will Grow
This is what I call the Bitcoin-Appreciation Thesis. It is an investment thesis I created and that motivates my decision to actively invest in the crypto market and helps me select my crypto investments.
It is made up of 3 parts/statements.
- BTC Halving – The Bitcoin halving event scheduled in May 2024 will drive transaction processing volume up as miners prepare for a new phase of their business with lower Bitcoin rewards going from the current 6,25 BTC to 3,125 BTC;
- Miners BTC Accumulation – Less BTC will be available in the market as miners have increased access to traditional sources of capital (for example, the stock exchange) and will not be forced to sell their BTC rewards to finance operations;
- Institutional Acceptance – The more institutional investors use BTC as a store of value, the higher the price, the less BTC will be available on the market.
BTC Halving
Halving in an interesting dynamic built-in the BTC network. This happens every 4 years. To be more specific, every 210.000 blocks mined, an operation that typically takes around 4 years. For every block of transaction approved, a miner gets a reward in BTC as an incentive for their contribution to the network. Every halving event, this rewards get cut in half.
Historically, this coincides with a moment of high activity (high transaction volume). This happens because the miners want to maximize the amount of rewards before it gets cut in half. This temporarily causes a drop in price (due to high transaction processing), followed by a period of low liquidity (because the miners accumulated lots of BTC as a consequence) and an expansion period. This can be clearly seen in the expansion periods following every halving event since 2012.
It is difficult to predict the consequence of the next halving event. Based on purely gut feeling, I expect an expansion of 500% (5x) in the years following the halving event in May 2024. This means that BTC may reach $ 500.000 as a result of the next halving event, combined with the dynamics explained in this article (miners accumulation and institutional acceptance).
Miners BTC Accumulation
The idea is very simple: thanks to institutional investors embracing Bitcoin (which they continue to do, but more on this later in this article), miners will gain access to traditional lines of funding through IPO, capital injections, and corporate loans. Because of this, they can retain the hard-earned BTC on their balance sheet since they have enough capital to run operations.
The Upward Cycle
This is a strong cycle for the appreciation of crypto investments. It is also a self-reinforcing cycle. More funding and growth capital available —> less need to sell BTC —> less BTC liquidity —> lower BTC supply —> higher BTC prices —> more funding and growth capital available (and the cycle repeats).
The biggest assumption here is the step where we assume that less BTC liquidity in the market leads to higher prices. This assumes a broad interest in BTC as a store of value. But this is exactly my 3rd point of the thesis. We will get to this in a second.
But… elephant in the room, what is actually happening now in the market? And why did we see such a drop in BTC price?
The Downward Cycle
The biggest driver here is energy prices. The recent ABSURD increase in energy prices is squeezing the miners’ margins and FORCES them to SELL BTC to pay salaries and keep their operation alive. Despite the loss they are taking on BTC because of the low prices.
This one, alas, is a self-destructive cycle for crypto investments. High energy prices —> lower margins —> more BTC are sold in exchange for cash —> lower BTC price —> lower margins (and the cycle repeats in a downward spiral). The spiral reverses if margins are somehow restored or energy prices drop!
Usually the miners economics are such that 80% of their costs are for the energy supply. Typically 57% of their energy supply comes from renewable sources. The other 43% from natural gas and coal. The BIG problem is that the energy prices for these two categories almost doubled since the beginning of the year! With natural gas 102% more expensive and coal 132%.
This trend is worrisome and might cause a further decline in BTC price if the energy prices do not drop and stabilize. This will continue as long as BTC price stays around $20.000.
Reasons to Think Miner Will Hold Their BTC Rewards
Once again, my investment thesis will work is miners continue to accumulate BTC. So big question: what is the probability this will happen?
I still believe this assumption is valid. Why? Here’s a few reasons.
• New Capital For Mining Corporations
Despite market conditions, investors are still very much interested in supporting mining corporations. In a recent funding round, three of the largest (private and stock-listed) companies raised new capital to bridge this difficult period (at least until May 2024, in preparation for the new halving).
Bitfarms $ 37 million
CleanSpark $ 35 million
Iris Energy $ 71 million
Crusoe Energy $ 505 million (growth capital)
PrimeBlock $ 1.300 million (from stock-listing via SPAC-merger)
• Full Attention From New Generations
New generations are very interested in using BTC as a store of value, replacing or together with the traditional ones. The percentage of millennials preferring BTC as a store of value is 66%. And this percentage will only go up with the newer generations.
• Institutional Acceptance
Another important domino piece that deserve its own section. Read on.
Institutional Acceptance
This is perhaps the biggest driver of all. The element that will make or break the market as we know it. Why?
“Whenever institutional investors step into any market, get out”.
Meaning, whenever there is enough attention from large institutional investors in a specific market, it is time to sell.
For example, after BlackRock’s (one of the world’s biggest wealth managers) stepped into the Dutch housing market, the market has been tremendously inflated to the point that the average couple cannot afford any longer to live in the city center, in cities like Amsterdam, Rotterdam, Utrecht, etc.
And, speaking of the devil, the same BlackRock has JUST announced a partnership with Coinbase to start offering crypto assets through their digital investment management platform Aladdin. This is the platform their financial advisors use to buy assets for their customers.
You can read the full article at Coinbase following this link: https://blog.coinbase.com/coinbase-selected-by-blackrock-provide-aladdin-clients-access-to-crypto-trading-and-custody-via-b9e7144f313d
With almost $ 8,7 TRILLION under management, their influence on the crypto market can be huge. To give you some perspective, the WHOLE crypto market is right now worth $ 1 TRILLION. Once again, the WHOLE crypto market is JUST $ 1 TRILLION. That is close to 10% of what BlackRock manages. Apple’s market value is $ 2,66 TRILLION as of this article! 2,66 times the WHOLE crypto market.
Concluding
So if you read this, you are STILL early in crypto, my dear reader. It’s a market where you need endurance and most importantly a good understanding of what is really going on.
I will see you in my next blog or email for the next portfolio update (if you are signed up to the newsletter, otherwise you can sign up here).
Until then – stay smart!
MNV
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Disclosure
These are unqualified opinions, and this newsletter, is meant for informational purposes only. It is not meant to serve as investment advice. Please consult with your investment, tax, or legal advisor, and do your own research.
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